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Monday, November 5, 2012

Minimum Wage to $9.50? $9.80? $10?

During the 2008 campaign, President Obama promised to raise the minimum wage to $9.50/hour by 2011. This pledge was made at a time when the economic slowdown was already underway: the recession started in December 2007. The pledge was also made at a time when an increase in the minimum wage was already underway: in May 2007, President Bush has signed into law an increase in the minimum wage, to rise in several stages from $5.15 to $7.25 in July 2009.

Last summer, some Democratic Congressmen tried to push the issue a bit. In June, 17 House Democrats signed on as co-sponsors of a bill authored by Rep. Jesse Jackson Jr. of Illinois for an immediate rise in the minimum wage to $10/hour--and then to index it to inflation in the future. In July, over 100 Democrats in the House of Representatives signed on as co-sponsors of a bill authored by Rep. George Miller of California to raise the federal minimum wage to $9.80/hour over the next three years--and then to index it to inflation after that point. But while raising the minimum wage was a hot issue in the years before Bush signed the most recent increases into law, these calls for a still-higher minimum wage got little attention.

For background, here are a couple of graphs about the U.S. minimum wage. The first graph shows the nominal minimum wage over time, and also the real minimum wage adjusted to 2011 dollars. In real terms, the increase in the minimum wage from 2007 to 2009 didn't quite get it back to the peak levels of the late 1960s, but did return it to the levels of the early 1960s and most of the 1970s--as well as above the levels that prevailed during much of the 1980s and 1990s. The second graph shows the minimum wage as a share of the median wage for several countries, using OECD data. The U.S. has the lowest ratio of minimum wage/median wage--and given the greater inequality of the U.S. income distribution, the U.S. ratio would look lower still if compared to average wages. However, because of the rise from 2007-2009, the U.S. economy has experienced the largest rise in the minimum wage from 2006-2011. (Thanks to Danlu Hu for producing these graphs.)

So why didn't calls for a higher minimum wage in summer 2012 get more political traction?

1) The unemployment rate in May 2007 was 4.4%, and had been below 5% for 18 months. The unemployment rate last summer was around 8.2%, and had been above 8% for more than 40 months. Thus, there was a lot less reason in May 2007 to worry about the risk that a higher minimum wage might reduce the number of jobs for unskilled labor than their was in summer 2012.

2) In summer 2012, average wage increases had not been looking good for most workers for several years, which made raising the minimum wage seem less appealing as a matter of fairness.

3) The increase in the minimum wage that President Bush signed into law that took effect from 2007 to 2009 made it feel less urgent to raise the minimum wage still further.

4) Some states have set their own minimum wages, at a level above the U.S. minimum wage. The U.S. Department of Labor has a list of state minimum wage laws here: for example, California has a minimum wage of $8/hour and Illinois has a minimum wage of $8.25/hour. Thus, at least some of those jurisdictions who favor a higher minimum wage are getting to have it.

5) In summer 2012, the Democratic establishment was focused on re-electing President Obama, and since raising the minimum wage was not part of his active agenda, it gave no publicity or support to the calls for a higher minimum wage.

6) In the academic world, there was a knock-down, drag-out scrum about the minimum wage going through much of the 1990s. David Card and Alan Krueger published a much-cited paper in 1994 in the American Economic Review, comparing minimum wage workers in New Jersey and Pennsylvania, and found that the different minimum wages across states had no effect on employment levels. (“Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania.”American Economic Review, September 1994, 84(4), pp. 772–93.). This conclusion was heavily disputed, and for those who want to get their hands dirty, the December 2000 issue of the American Economic Review had 30+ pages of critique of the Card-Krueger paper and 30+ pages of response. I won't seek to mediate that dispute here. But I think that the academics who were driving the arguments had sort of exhausted themselves by the time the 2007 legislation passed, and no one seemed to be slavering for a rematch.

I was lukewarm on the rise in the minimum wage that was enacted in 2007. It seems to me that there are better ways to help low-wage workers. But that said, if the minimum wage isn't very far above the market wage for unskilled labor (and in some places may even be below the market wage for unskilled labor), there's no reason to believe that it will have large effects on employment. However, raising the minimum wage further to the range of $9.50/hour or $10/hour would in many parts of the country push well above the prevailing wage for unskilled labor, especially in a still-weak economy, and so the effects on employment would be more deleterious.

"Here’s an insight for opponents of a higher minimum wage to
mull over: Let’s say a 20 percent rise in the minimum wage leads to 4 percent
fewer jobs for low-skilled workers (as some of the evidence suggests). But this
also implies that a higher minimum wage leads to a pay raise for 96 percent of
low-skilled workers. Many people in low-skill jobs don’t have full-time,
year-round jobs. So perhaps these workers work 4 percent fewer hours in a year,
but they get 20 percent higher pay for the hours they do work. In this
scenario, even if the minimum wage reduces the number of jobs or the number of
hours available, raising it could still make the vast majority of low-skilled
workers better off, as they’d work fewer hours at a higher wage.

"There’s another side to the argument, however. The
short-term costs to an individual of not being able to find a job are quite
large, while the benefits of slightly higher wages are (relatively speaking)
somewhat smaller, so the costs to the few who can’t find jobs because of a
higher minimum wage may be in some sense more severe than the smaller benefits
to individuals who are paid more. Those costs of higher unemployment are also
unlikely to be spread evenly across the economy; instead, they are likely to be
concentrated in communities that are already economically disadvantaged. Also,
low-skill jobs are often entry-level jobs. If low-skill jobs become less
available, the bottom rung on the employment ladder becomes less available to
low-skilled workers. Thus, higher minimum wages might offer modest gains to the
substantial number of low-skilled workers who get jobs, but impose substantial
economic injury on those who can’t.

"There are alternatives to price floors, and economists
often tend to favor such alternatives because they work with the forces of
supply and demand. For example, if a government wants to boost wages for
low-skilled workers, it could invest in skills-training programs. This would
enable some of those workers to move into more skills-driven (and better paying)
positions and would lower the supply of low-skilled labor, driving up their
wages as well. The government could subsidize firms that hire low-skilled
workers, enabling the firms to pay them a higher wage. Or it could subsidize
the wages of low-skilled workers directly through programs such as the Earned
Income Tax Credit, which provides a tax break to workers whose income is below
a certain threshold. This policy increases the workers’ net income without
placing any financial burden on the employers."

What I didn't point out in the book is the political dynamic that raising the minimum wage allows politicians to pretend that they are helping people at zero cost--because the costs don't appear as taxes and spending. But pushing up the minimum wage substantially now, after the recent increases and in a still-struggling economy, does not strike me as wise policy.

Addendum: Thanks to reader L.S. who let me know that my argument here--a minimum wage law can play a useful redistribution function under certain labor market assumptions, but in general it is better for the government to move to a lower minimum wage and higher government support for low-wage workers--is quite similar to the more formal case made by David Lee and Emmanuel Saez in their recent Journal of Public Economics article, "Optimal minimum wage policy in competitive labor markets."